Earnings Transcript for HESM - Q1 Fiscal Year 2023

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2023 Hess Midstream Conference Call. My name is Gigi, and I will be your operator for today. [Operator Instructions]. I would now like to turn the conference over to Jennifer Gordon, Vice President of Investor Relations. Please proceed.

Jennifer Gordon: Thank you, Gigi. Good afternoon, everyone, and thank you for participating in our first quarter earnings conference call. Our earnings release was issued this morning and appears on our website, www.hessmidstream.com. Today's conference call contains projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ from those expressed or implied in such statements. These risks include those set forth in the Risk Factors section of Hess Midstream's filings with the SEC. Also on today's conference call, we may discuss certain non-GAAP financial measures. A reconciliation of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures can be found in the earnings release. With me today are John Gatling, President and Chief Operating Officer; and Jonathan Stein, Chief Financial Officer. I'll now turn the call over to John Gatling.

John Gatling: Thanks, Jennifer. Good afternoon, everyone, and welcome to Hess Midstream's First Quarter 2023 Conference Call. Today, I'll discuss our first quarter performance, which demonstrates a continued focus on the safe execution of our operational strategy while simultaneously advancing our financial priorities. I will also review Hess Corporation's results and outlook for the Bakken. Jonathan will then review our financial results and guidance. In the first quarter, we successfully advanced 2 key priorities

Jonathan Stein: Thanks, John, and good afternoon, everyone. We continue to execute a financial strategy that includes return of capital to shareholders as a priority and a demonstrated track record of differentiated shareholder returns. Since the beginning of 2021, we have returned $1.25 billion to shareholders through accretive repurchases that have reduced our total unit count by 17%. In addition to the combination of our 5% targeted annual distribution growth and 3 distribution level increases following each repurchase, we have increased our distribution per Class A share by approximately 30% over this period. As a result, our total shareholder return yield is one of the highest of our midstream peers. Furthermore, our leverage of approximately 3x adjusted EBITDA is one of the lowest among our peers, highlighting our differentiated ability to deliver significant shareholder returns while also maintaining balance sheet strength. With our recently completed unit repurchase and distribution level increase, we continue our track record of shareholder return through our return of capital framework. In January, we announced that we expect to generate greater than $1 billion of financial flexibility through 2025 for capital allocation, including potential ongoing unit repurchases. Utilizing this capacity, our recent repurchase transaction of $100 million is approximately 1.5% accretive on a distributable cash flow per Class A share basis with public ownership of Hess Midstream on a consolidated basis, increasing to approximately 18.3%. Supported by the repurchase, we recently announced a further return of capital to our shareholders through an immediate 1.5% increase in our quarterly distribution level beyond our targeted 5% annual distribution per Class A share growth. As we have done in the past, with the reduced share count following the repurchase, this distribution level increase is fully funded by the associated distributed cash flow. From this new higher level, we will continue to target at least 5% annual distribution growth per Class A share through 2025 with expected annual distribution coverage of at least 1.4x. Following the unit repurchase, we expect to continue to have more than $1 billion of financial flexibility through 2025 that can be used to continued execution of our return on capital framework, including potential ongoing unit repurchases. Turning to our results. For the first quarter of 2023, net income was $142 million compared to $150 million for the fourth quarter of 2022. Adjusted EBITDA for the first quarter of 2023 was $239 million compared to $245 million for the fourth quarter of 2022. The change in adjusted EBITDA relative to the fourth quarter of 2022 was primarily attributable to the following. In the first quarter of 2023, our tax rates and physical throughput volumes were higher, including an approximate 7% increase in gas processing volumes as we transition from higher MVC levels in 2022 to growing physical throughput volumes in 2023 that are at or above MVCs. Total revenues, excluding pass-through revenues decreased by approximately $10 million, resulting in segment revenue changes as follows

Operator: [Operator Instructions]. Our first question comes from the line of Doug Irwin from Citi.

Douglas Irwin: Just trying to start with EBITDA margin. I think you've guided to 75% margins for 2023. And if you look at 1Q margins, I think it came in at 83%, and it's been well above 75% for the last few quarters as well. I'm just curious what's driving this outperformance, and if that's something that's sustainable moving forward.

Jonathan Stein: Sure. So really, I mean, in terms of our EBITDA margin and just at the level that we said targeting 75%, really, that's first driven by our lean philosophy, which enables us to drive our operating costs lower and really a material proportion of our cost base is relatively fixed. So therefore, with growing volumes and revenue and comparatively lower variable operating expenses, we have a robust EBITDA margin. We set target 75%. But as you know, we look to continue as historically, we have exceeded that. So if you look back really over the years, we really have been just historically above that, including this year's -- this quarter's EBITDA margin, which is just above 80%. So really, I think you should look at that as sort of a target but something that we look to continue as we've done in the past to continue to meet or exceed that. So I expect to be continue in that direction.

Douglas Irwin: Got it. That's helpful. And then I was just hoping you could provide a little more context just around how you landed on the size and the timing of this first buyback this year, and maybe how you're thinking about potential buybacks throughout the remainder of the year? I guess, is this going to be kind of a quarterly decision you're looking at? Or is it maybe a little more opportunistic than that?

Jonathan Stein: Sure. So first, just a reminder, our return on capital framework has really 2 elements, first is the 5% annual distribution growth through 2025 at least. And then, of course, the repurchases, which are an incremental return on capital, utilizing our available financial flexibility. If you look back how we've done this historically in '21 and '22, we really did one large buyback transaction per year. What's really changed now as we go forward, we intend to do multiple buybacks per year on an ongoing basis through 2025, using the more than $1 billion of financial flexibility that we've talked about. And really, the $100 million buyback was really the start of this approach. So what we expect is, again, we would see multiple opportunities each year starting this year, starting with the $100 million and again multiple opportunities for the rest of this year. Together with potentially related distribution level increases like we did here following the repurchase when we have the lower share count as a result of the repurchase, we have the opportunity to utilize that additional capacity to just bring us back to the same distributed cash flow and increase our distribution level. But overall, really the change is rather than doing this one per doing this multiple per year. And through that, we think there will be significant ongoing accretion as we significantly continue to reduce our share count over the period.

Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.